Recession saps energy from ethanol industry

A year ago, the ethanol industry was riding high on spiraling gas prices that made corn-based biofuel a highly attractive home-grown supplement to costly gasoline. Federal mandates were in place to more than triple ethanol production by 2022.

Since then, the bottom has fallen out of the industry. Newly built refineries are shutting down, and some ethanol companies are facing bankruptcy.

"We are all struggling, there's no hiding that," said Scott Pearce, president of Biofuel Energy Corp., which inaugurated two 115 million gallon per year ethanol plants last fall in the Midwestern corn belt. "Our timing couldn't have been worse."

The global recession continues to keep gas prices low, while corn remains relatively high, squeezing the profit margins for ethanol at the nation's 180 production plants.

When gas prices are high — say $3 a gallon or more — it makes economic sense for retailers to blend their product with cheaper ethanol. But when prices are low — around $2 a gallon, where they currently reside — ethanol becomes less viable.

At the same time, corn, the main feedstock for the U.S. ethanol industry, sells for about $4 a bushel, well above its decade-long average of $2.60.

In its second term, the Bush administration gave biofuels a big push as part of its quest to reduce U.S. dependence on foreign oil, creating a mandate for blending gasoline with 10 percent ethanol.

The long-term goal was to produce 36 billion gallons a year by 2022, about one quarter of current U.S. gasoline consumption. The industry hit 12 billion gallons last year, well above a target of 9 billion gallons.

But over the past six months, plant closings have resulted in a loss of about 21 percent of capacity, the industry reports. The industry has also faced intense scrutiny over reports questioning the efficiency of corn-based ethanol, as well as its environmental benefits compared to gasoline.

The ethanol industry disputes those studies, saying modern biofuels production produces 50 percent less greenhouse gases, such as carbon dioxide, which scientists say cause global warming. They also argue that newer plants have improved energy efficiency.

To expand, the industry says it needs a bigger chunk of the retail market. Production in recent years grew so fast it outpaced the government's 10 percent blending cap, creating an ethanol glut, said Todd Alexander, a New York lawyer and industry adviser.

The industry may still be able to meet its federal target this year of 11.1 billion gallons. But funding for new plants has all but dried up and next year's target of 12.9 billion seems like a long shot.

"What the industry faces is a political problem," said retired U.S. Army Gen. Wesley Clark, a former presidential candidate who recently joined Growth Energy, an ethanol industry association. "The government needs to raise the limit to get the next big surge for ethanol," he added, saying a 15 percent blend would help renew financial investment in ethanol refineries.

The petroleum industry fiercely objects to raising the cap, and instead wants it abolished. It's unclear whether the Obama administration will come to the ethanol industry's aid, but the political signs are favorable.

"The federal government is committed to having ethanol," said Keith Collins, an independent consultant and former chief economist at the Department of Agriculture.

The new agriculture secretary, former Iowa Gov. Tom Vilsack, is a longtime proponent of ethanol as a key to rural development. Energy Secretary Stephen Chu, a Nobel prize-winning physicist, is also a steadfast supporter of next-generation biofuels such as "cellulosic ethanol,'' made from non-food crops, such as switch grass, as well as plant and timber waste.

Obama has made renewable energy a core component of his recent economic stimulus package, which included an additional $6 billion in federal loan guarantees for the development of "innovative" energy technologies, including biofuels.

Lack of financing has also delayed projects, including some looking to use Florida crops, such as sugar cane and sweet sorghum.

Highlands Envirofuels' plans to produce 20 million gallons per year of ethanol from sweet sorghum near Lake Placid is progressing slowly. "It's an extremely difficult financing environment right now," said Bradley Krohn, the company's president.

Verenium, a cellulosic ethanol company backed by British Petroleum, had to delay construction on a 36-million-gallon cellulosic ethanol plant, also in Highlands County, until at least 2010. Another company, Coskata, is raising money for a 50-million- to 100-million-gallon project using a mix of crops as well as plant and municipal waste, on land owned by Florida sugar growers.